Did Memo Cause Recent Bankruptcies?

Earlier this year, a spate of retailers went Chapter 11. Now, it appears to be the manufacturers’ turn.

In the aftermath of The JCK Show, two noted designers (Henry Dunay Designs and Michael Beaudry), one noted jewelry manufacturer (Speidel), and one noted retailer/designer (David Webb) all filed Chapter 11. (See box for details.)

The bankruptcies followed dire warnings at JCK Show forums that the industry’s manufacturing sector was in bad shape and too reliant on consignment and credit.

“This industry has a tradition of vendors undercutting each other with aggressive memo programs that are not sustainable,” warned Michael O’Hara of Consensus Advisors, at the Indian Diamond and Colorstone Association’s annual dinner. “That is a gray cloud hanging over the industry.”

Dunay, probably the best-known name to file recently, told JCK that memo was “one of the main reasons I had to do this.”

Indeed, his company’s court filing in part blamed “the decision of the Neiman Marcus Group to take setoffs and not remit approximately $3 million in funds owed for goods.”

“I don’t mind if somebody calls me and says I have a customer looking for something special,” Dunay said. “But when it sits in the store for a few months just to fill in the window, that is killer.”

Martin Rapaport struck a similar note at his annual “State of the Diamond Industry” presentation in Las Vegas. He noted that many dealers historically offered memo because they assumed diamond prices would always increase. But with prices down, that business model has become a “recipe for disaster,” he warned.